The Sustainable Sector Transformation Model

Sustainable Sector
Transformation
How to drive sustainability performance in
smallholder-dominated agricultural sectors?
2015
Commissioned by IFC
About this project
This research forms part of a project funded by the International Finance
Corporation, the Dutch Ministry of Foreign Affairs, SECO and IDH the sustainable
trade initiative in which Aidenvironment, NewForesight and IIED sought to develop
a holistic transformation model to scale sustainability in smallholder dominated
agricultural commodity sectors.
For more information about the project and to access other research reports in the
series please visit: http://sectortransformation.com
About the organisations
Aidenvironment is an independent value-driven consultancy. It advises clients in
realizing their ambitions in sustainable market transformation in the most prominent
commodity sectors. Aidenvironment is known for its in-depth knowledge, reliable
quality and good advisory skills, and is continuously asked to work for frontrunners in
the private, public and non-profit sector. www.aidenvironment.org
NewForesight facilitates sustainable market transformations. As a strategic
consultancy NewForesight addresses the global challenges of our time.
NewForesight develops innovative strategies, unites stakeholders around a
transformative vision for their sector and drives implementation. For more information
visit: www.newforesight.com
IIED is one of the world’s most influential international development and environment
policy research organisations. We build bridges between policy and practice, rich and
poor communities, the government and private sector, and across diverse interest
groups. For more information visit: www.iied.org
Published by Aidenvironment, NewForesight and IIED.
Molenaar, J.W., Gorter, J., Heilbron, L., Simons, L., Vorley, B., Blackmore, E.,
Dallinger, J. 2015. Sustainable Sector Transformation: How to drive sustainability
performance in smallholder-dominated agricultural sectors? White Paper 1.
Commissioned by IFC.
Available to download at: www.sectortransformation.com
ISBN 978-1-78431-160-5
Photo: owned by NewForesight
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Introduction
Agriculture has performed well over the last 50 years, in both keeping pace with rapid population growth and in
delivering food at progressively lower prices. Unfortunately this growth has led to overuse of natural resources and
the release of greenhouse gases and other pollutants. In addition, many agricultural producers continue to live at or
below the poverty line, and agricultural workers are often subject to unacceptable working conditions. Sustainable
production of agricultural commodities is necessary to ensure food security, a healthy natural resource base and
human wellbeing.
Addressing sustainability issues in agro-commodity sectors is challenging. The challenges for smallholderdominated sectors relate to productivity and compliance with ‘sustainability’ systems and proof of that compliance.
In the majority of these sectors, current transformation models, whether public or market driven, have only had
limited success.
This paper presents a sustainable sector transformation model which takes a holistic approach to transformation.
It begins with an explanation of some of the dynamics of sector transformation. It then presents the limits of purely
public or market-driven models, before finally presenting the five building blocks that make up the model.
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Understanding sector
transformation
• a shift from project-based interventions, to
programmes and market mechanisms that focus on
structural change complemented with regulation to
make sustainable practices the norm;
Experience from the last few decades has generated
insights into the transition patterns of commodity
markets towards more sustainable production systems.
The transition of markets towards sustainability in
individual countries follows a transformation curve
(see Figure 1: The S-Curve of Market Transformation).
As a sector moves through the various phases, the
number of stakeholders who adopt sustainable
practices in the sector increases, until sustainability
becomes a requirement for market entry. There are four
distinct phases in the transition towards sustainability.
Each phase marks a new level of understanding of
what sustainability means within a sector and what
is required to achieve it. Each phase also sees the
adoption of different approaches to sustainability, with
sustainability increasingly entering the mainstream as
one progresses along the curve. The transition from
inception to institutionalisation generally involves:
• mainstreaming sustainability until it becomes a
licence to operate.
• increasing involvement of different stakeholder
groups, with increased sector coordination;
• an increasing professionalisation of
farming enterprises;
Several ‘traditional’ commodity sectors, having
faced sustainability problems for over a decade, find
themselves in 2015 at the beginning of the critical
mass phase. Examples are:
• Coffee Vietnam: is 29 per cent certified and has
seen significant investments in sustainability projects
but sector coordination is still limited;
• Cocoa West Africa: is 20 per cent certified and has
improved its coordination through several platforms
and sector wide initiatives; large scale investments
are geared towards a more sustainable sector but
sustainability issues still persist;
• Cotton Mali: 25 per cent included in the Better
Cotton Initiative system and increasing investments in
addressing some persistent sustainability issues
• Palm oil Indonesia: 12 per cent RSPO certified,
national compulsory sustainability standard
rolled out, no-deforestation policies of majority of
export markets
Figure 1: The S-Curve of Market Transformation
2. First movers
3. Critical mass
% sector sustainable
1. Inception
4. Institutionalization
© NewForesight
Driving
commitment
to sustainability
• Civil society
• Front runner
companies and
donors
• Follower companies
and donors
• All, including
government
Producers
adopting
sustainable
practices
• Those involved
in specific, niche
projects.
• Early adopters, with
existing sustainable
capacity.
• Better organized
and capitalised
farmers
• Late adopters,
with sector-based
support
• All
Intervention
• Projects
• Standards and
certification
• Non-competitive
investments
• Regulation and
non-competitive
investment
Market demand
• Niche
• Growing, but not yet • Mainstream
mainstream
• Licence to operate
Coordination
• None
• Competition
• Full alignment
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• Emerging alignment
and collaboration
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Some sectors, despite high levels of awareness of
sustainability issues, are still in a first mover phase. An
example is soy in Brazil where only a limited amount
is produced according to sustainability standards,
but which does have a reasonably well-functioning
moratorium on soy production in place, aimed at halting
deforestation. In other sectors, such as rice and rubber,
attention to sustainability is more recent and actors are
still in an inception phase.
Sectors where institutionalisation of sustainability has
taken place are still rare. Some coffee sectors in Latin
America could be considered to have reached this
stage (Costa Rica and to some extent Colombia), or
the tea sector in Kenya. They all possess some (but not
all) characteristics of institutionalised sustainability, but
a number of sustainability issues persist.
Sector approaches versus
market-led approaches
Until the 1990s efforts to reform agricultural sectors
focused on sector governance models and building
institutional capacity, for example of extension services
or marketing boards. The results of these efforts have
been mixed. Despite some successes, many lacked
the required connection to the market to establish
sustainable growth, and investments were often
associated with mismanagement and very high and
unsustainable costs.
Since the 1990s there has been increased concern
about the social and ecological impacts of agricultural
production. In that same period, agricultural
interventions shifted to market oriented, company
and supply chain driven approaches. This created the
space for civil society and the private sector to define
collectively, or unilaterally, what sustainability is and
how it should be achieved. Voluntary Sustainability
Standards (VSS) rose to prominence as multistakeholder instruments to link market demand for
sustainability with a supply of sustainably produced
commodities. They have proved to be instrumental in:
• providing a common reference for sustainability by
operationalising the concept of sustainability into
practices and norms
• promoting transparency in supply chains combined
with assurance and traceability to substantiate
sustainability claims
• building consumer, industry and producer awareness
of sustainability
• providing a platform for sector dialogue and
governance
• mobilising market-driven incentives for sustainability
• mobilising investments in producer organisation
and training.
• promoting transparency in supply chains combined
with assurance and traceability to substantiate
sustainability claims
In terms of market reach, VSS today cover between 20
per cent and 30 per cent of global production of some
products, but in other sectors their reach is still limited.
Overall it appears that market driven approaches,
including VSS, face limits in terms of uptake and
impact, especially in sectors dominated by unorganised
smallholders (see Figure 2: Challenges of VSS Theory
of Change). A white paper on the role of VSS in our
sustainable transformation model is available at [link].
Figure 2: Challenges of VSS Theory of Change
Lack of demand in
many sectors
Demand
Declining competitive
advantage of label
use and sustainability
not main criterion for
consumer purchases
Supply
Added
value
Reaching unorganised farmers
is costly and a minimum
level of capabilities and
resources is required to adopt
comprehensive standards
Implementation Unsustainable funding model
basad on profits from Western
of best
industry and donor money
practices
Credibility
of claims
Credibility impaired
due to impact and
assurance issues
Impact
Assurance
Limited impact
assessments and
mixed impact results
Issues with the quality
of audits
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Figure 3: Sector Transformation Models
Supply chain approach
Buyer driven approaches
such as certification, farmer
support, outgrower models
Low
Improvement of Hard times
Farners perform poorly in a
dysfunctional sector
Improvement of farm quality
High
Farmer and sector quality
Farming creates and retains
sufficient value to invest
sector quality
High
Sector approach
e.g. investments in extension
services, input subsidies,
marketing boards
Low
Sector
transformation
model
Sector approach
Supply chain approach
Farm and sector quality
Main driver
• Public sector driven
• Buyer driven
• Both buyers and public sector
Examples
• Extension services
• Input subsidies
• Marketing boards
• Certification
• Farmer support
• Outgrower models
• Functioning partnership
platforms
• Demand-driven service sector
• Complementary sector-wide
investments and regulation
• Sector-wide monitoring and
learning
Challenges
• Public extension services have
often not been client-centred,
and have been subject to
political interference
• Very high cost of extension
services and input subsidies
– create entrenched vested
interests
• Marketing boards block
traceability and hence do not
meet buyers’ needs for quality
and integrity.
• Scale and scope of impact
restricted by demand
• Only reaches ‘low-hanging
fruit’
• Creates islands of
sustainability
• Does not knit together farms,
communities and landscapes
•
•
•
•
Both market transformation approaches have
introduced relevant instruments with some good results
but also faced significant challenges which have been
difficult to overcome. Recognising the strengths and
limitations of past models, we therefore advocate
for an approach where the investments needed to
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Alignment of stakeholders
Resource mobilisation
Accountability
Safeguarding a long-term
strategy
achieve sector transformation are redesigned from the
perspective of wide-scale transformation, and target
both the farm level and sector level (see Figure 3:
Sector Transformation Models).
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Focus on farm and sector
level
To promote sector-wide improvement in sustainability
performance, a more holistic approach is needed.
Public and private sector need to work together in a
way that impacts the sector as a whole, with tailormade approaches for different types of producer. In
such an approach VSS are one instrument that can
be used in the transformation, but they need to be
complemented with other approaches and investments
– both in the value chains and for the sector as
a whole.
Such a collaboration starts with a joint vision of what a
sustainable farm is. This ‘farm quality’ (FQ) is defined
not only by its social and environmental performance
but also by its capacity to be a viable business: its
productivity, profitability and entrepreneurialism.
At a macro level the different stakeholders need a
joint vision of what ‘sector quality’ is: the capacity
of a sector to foster the growth of farm quality
among its producers and to generate and retain an
economic surplus reinvested in FQ. Again, this is a
wider definition of sustainability than just social and
ecological outcomes at a macro level and also includes
economic competitiveness, resilience in the face
of market and climatic volatility and the capacity to
provide high quality services to farmers (see Figure 4:
Farm & Sector Quality)
Farm and Sector Quality
To organise a sector around improving farm and sector
quality requires acknowledgement of two principles.
The first one establishes that transformation only
occurs if the incentives in the market encourage
continuous improvement. The second one is that there
is sufficient value retention at the production base to
re-invest in a sector with reduced external assistance.
Figure 4: Farm and Sector Quality
Farm quality – system
requirements
• Apply required knowledge (business and GAP)
• Optimize input use
• Viable farm size
• Sufficient negotiating power
• Respect social and environmental norms/laws
• Farmers are entrepreneurial and have the financial
capacity to manage risks and to invest in their
farms
Sector quality – system
requirements
• Is able to ensure access to quality technical
assistance, inputs and finance
• Is able to reward good performance (e.g.
sustainability and quality) and remove worst
practices)
• Production base captures sufficient % of
consumer value and re-invests in the sector
(productivity, quality)
• The sector manage or organize collective action
on public goods and natural capital
• Ensures a balanced voice and control
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Continuous improvement
Sector transformation is a step-wise process of
improvement, which requires continuous rewarding
of good performance and removal of worst
practices. An intrinsic business case is needed
for continuous improvement of farm quality and all
farmers should get a fair chance to improve on farm
quality (see Figure 5: Continuous improvement).
It also implies that for those farmers who continue
worst practices or are not willing to improve,
alternative livelihoods should be considered and
promoted. This can include the production of other
crops or a shift to off-farm employment.
Value capture at the production
base
The financing of sector transformation requires
a differentiated funding base, which includes
producers themselves, domestic industry,
national governments, and the financial sector
(see Figure 6: Value capturing at the production
base). Current investments are primarily donordriven, particularly from Northern donors, often
complemented by investments from Northernbased multinationals. This is unlikely to be a
sustainable funding model to achieve long-term
sector transformation. Sector transformation
should always lead to a state whereby the
production base itself is able to finance its
operations and the maintenance of sustainability.
Figure 5: Continuous improvement
High level
of farm
quality
Low level
of farm
quality
Alternative
livelihoods
Figure 6: Value capturing at the production base
Manufacturing
Trade
Processing
National
public
sector
Production
Sector transformation
model – five building blocks
The model for sustainable sector transformation in
smallholder-dominated agricultural sectors consists
of five building blocks: I. Sector alignment and
accountability, II. Strengthening of market demand,
III. Public sector governance, IV. Organisation of the
production base and V. Organisation of the service
sector (see Figure 7: The five building blocks of sector
transformation). Each of these building blocks is a
condition for realising farm and sector quality. For an
extensive report on the model and its building blocks
see link.
A brief description of each building block and an
example from one of our cases are given below.
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Figure 7: The five building blocks of sector transformation
I. Sector alignment and accountability
• Platform for sector dialogue,
alignment and coordination
• Shared vision and interest: FQ
and SQ
• Joint strategy towards vision
• Alignment of investments,
technology packages and
farmer support measures
• Monitoring, assurance and
learning
III. Public sector
governance
IV. Organization of the
production base
II. Strengthening of
demand
• Regulation and
governance of
market
• Support
mechanisms by the
government
• Effective producer
organization for the
service market
• Effective producer
organization for the
product market
• Market alignment
and discipline
• Good buying
practices
• Product traceability
V. Organization of the
service sector
• Technical
assistance
• Input provision
• Financing
Sector alignment & accountability
Cocoa in Cote d’Ivoire
Crucial in this building block is the development of
a vision on farm quality and sector quality, including
the definition of a step-wise improvement path. This
vision should be shared by all relevant stakeholders
and translated into a strategy that clearly defines
roles and responsibilities between stakeholders.
Each stakeholder should be held accountable for key
performance indicators (KPIs). Progress on the KPIs
should be monitored and the monitoring data should
be used to adopt the strategy and stimulate sectorwide learning.
The desired level of sector alignment and accountability as
described in our model is hard to find in a current sector.
The cocoa sector in Cote d’Ivoire seems closest to getting
there. The private sector has committed itself, through
the CocoaAction initiative, to a vision for a sustainable
cocoa sector. It has a joint set of goals and KPIs to which
companies will hold each other accountable, while the
strategies they use to reach these KPIs are competitive and
vary from company to company. The next step will be to
develop a functioning public–private partnership with the
Conseil de Coffee Cocoa (CCC) to create alignment in
vision, targets and shared accountability. For the complete
case study see link.1
Strengthening market demand
Palm oil in Indonesia
The market should align behind the vision and
organise its procurement practices in such way that it
rewards improvement and excludes worst practices.
This requires buyers to position themselves as
preferred buyers to producers and possibly provide
additional services such as capacity building or inputs.
In the Indonesian palm oil sector examples can be found
where the lack of market alignment has a clear negative
sustainability impact. In certain regions some crude palm oil
mills refuse to buy from farms that are located on recently
or illegally deforested land. However, multiple cases exist
where these farmers can sell their produce to other CPO
mills which do not have such policies in place. Consequently,
palm oil farmers still have an incentive to deforest despite the
efforts to remove these practices by some buyers. For the
complete case study see link.2
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Public sector governance
Cocoa in Ghana
The public sector has an important role to regulate
and support sector transformation, particularly
where the market fails. This includes enforcing
social and environmental regulation (e.g. land tenure,
labour, and conservation); providing investments
(e.g. infrastructure, research, input subsidies); and
governing the market to ensure effective quality
differentiation and price transmissions, reduce
price volatility and improve sector organisation (e.g.
minimum prices, quality regulation, marketing boards).
For a paper on sector governance see link. 3
The government holds a tight grip on the Ghanaian cocoa
sector, where COCOBOD plays a pivotal role. All export
sales are successfully managed by the Cocoa Marketing
Company. Experienced and knowledgeable traders are in
place and Ghana has a good global reputation as a seller of
high quality cocoa at premium prices. In theory the country
should be able to finance its own sector transformation,
through its investments in technical assistance, crop
spraying, research, seed production, etc. But these schemes
have been found to be patchy in coverage and inefficient.
In addition social and environmental regulation properly
enforced. The potential of COCOBOD seems underused.
For the complete case study see link.4
Organisation of the production base
Cotton in Mali
Key for wide-scale promotion of sector quality is to
organise producers around service delivery and the
market. Organisation could be achieved in different
ways, including through service provider networks,
outgrower schemes, supply chain networks,
cooperatives or sector-wide organisation. The
organisation of the production base can enable the
market to reward good performance and exclude
worst practices.
The cotton sector in Mali has a highly organised production
base. All 167,000 farmers are members of cooperatives,
which in turn are all members of the national union of
cotton producers, UN-SCPC. This union partly owns the
state-sanctioned monopolist cotton company CMDT. This
organisational set-up enables CMDT to reach out to all
farmers with inputs, credit and technical assistance, to
procure the cotton and to collect farm-level data. Despite
concerns about the balance of power, transparency and
efficiency, this sector has good potential to promote sectorwide change. This will, however, require a clear vision on
farm quality which is currently lacking. For the complete case
study see link.5
Organisation of the service sector
Coffee in Vietnam
Services such as extension, inputs and finance
need to be accessible, demand-driven, bundled
where possible and of high quality. Ideally, services
should be provided by a competitive market of
service providers that treat farmers as clients and in
which services are increasingly paid for by farmers
themselves. Service delivery should also reward
good performance and exclude worst practices. In
the absence of a professional service sector, buyers
or the public sector could organise rewarding good
performance alongside the complementary – possibly
non-competitive – investments to build a professional
service sector. Small sector levies and taxes may
offer potential for longer-term sector-wide financing
of services. For a white paper on service delivery
see link.6
Coffee yields in Vietnam are very high, demonstrating that
the service sector is well organised for productivity. Yet the
service sector is not organised for sustainability. Overuse
of water and fertiliser is damaging the environment and
leading to sub-optimal profits. The challenge is therefore not
the provision of these inputs, but the optimisation of their
use. Vietnam also demonstrates that even in a well-serviced
environment, where farm-gate prices have reached the
maximum attainable percentage of the FOB price, farmers
have little access to capital. For the complete case study
see link.7
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Organising the building
blocks
The extent to which the above building blocks need
to be strengthened is context specific, but a focus
on only one or two dimensions is bound to lead to a
failure to completely transform sectors where there are
many unorganised smallholders. Each building block
is a condition for effective sector transformation, but
its importance may differ depending on the sector
characteristics. This transformation is likely to be a
process that takes a number of years and its pace very
much depends on the time it takes to create alignment
and how seriously each stakeholder takes their own
role in the transformation. The required steps should
follow a logical order in order to be most effective. It is
hard to prescribe this in generic terms beyond the first
steps. After that the steps become dependent on the
specifics of the sector. Transformation will generally
follow this track:
1. A group of stakeholders with critical weight in the
sector take the initiative to transform the sector.
The initiating group should engage the other
major actors and develop a shared vision on
farm and sector quality and the implications for
the organisation of the production base and the
organisation of the service sector.
2. The major actors align behind this vision,
develop a strategy to realise the vision and agree
on a monitoring and assurance mechanism.
Accountability is key and requires a strategy that
is measurable. Many of the failed transformation
initiatives lack joint accountability.
3. The production base is reorganised effectively
for the service and product market. Likewise,
the service sector should cater effectively to the
production base. This is not a matter of organising
one before the other. It is about a stable symbiosis
between service and production sectors, where
producers can pay for services that will further their
continuous improvement cycle.
4. Implementing the vision/strategy will require
a combination of public and market-oriented
measures, based on capacity and desire to
implement change in the sector. If the dominant
actor is the government, then the initial focus of
the transformation should be on improving public
sector governance. If the private sector is relatively
concentrated and buying companies, traders or
service providers have leverage over producers,
then the role of the private sector in realising the
transformation will likely be stronger. Both the
public and private sector will always have to be
involved in order to ensure consistent messages
and incentives for farmers, whether via demand,
service delivery or policy. In line with this thinking,
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the public or private sector has an important role in
building up a professional service sector.
Conclusion
Transforming a smallholder-dominated agricultural
sector from ‘hard times’ to farm and sector quality
(Figure 3) is not an easy task. Previous transformation
models have either tried to use a supply chain or a
sector approach. Despite considerable progress, these
approaches have not yet led to the desired results. In
this paper a new model is proposed. This sustainable
sector transformation model is holistic and it consists
of five major building blocks that are conditions for
change. The model is guided by two principles. The
first one establishes that transformation only occurs
if the incentives in the market encourage continuous
improvement. The second one is that there is sufficient
value retention at the production base to re-invest in
the sector with limited external assistance.The model
can be used to guide sustainable transformation of a
sector. Since this will be a long-term process, the focus
of interventions may vary according to sector – as
long as sector alignment and accountability function
well. We have shown this by applying our model to five
case studies.
Notes
1 http://sectortransformation.com/wp-content/
uploads/2015/03/cocoaivorycoast.pdf
2 http://sectortransformation.com/wp-content/
uploads/2015/03/palmoilindonesia.pdf
3 http://sectortransformation.com/wp-content/
uploads/2015/03/sectorgovernance.pdf
4 http://sectortransformation.com/wp-content/
uploads/2015/03/cocoaghana.pdf
5 http://sectortransformation.com/wp-content/
uploads/2015/03/cottonmali.pdf
6 http://sectortransformation.com/wp-content/
uploads/2015/03/servicedelivery.pdf
7 http://sectortransformation.com/wp-content/
uploads/2015/03/coffeevietnam.pdf
11
This paper presents a sustainable sector transformation
model for smallholder dominated agricultural commodity
sectors which seeks to take a holistic approach to
transformation by combining supply chain and sector
dynamics. Its five building blocks are explained using
examples from different countries and sectors.
This research forms part of a project funded by the
International Finance Corporation, the Dutch Ministry of
Foreign Affairs, SECO and IDH the sustainable trade
initiative in which Aidenvironment, NewForesight and
IIED sought to develop a holistic transformation model to
scale sustainability in smallholder dominated agricultural
commodity sectors.
For more information about the project and to access
other research reports in the series please visit:
http://sectortransformation.com